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Pro forma CPI

Our weekly commentaries provide Euro Pacific Capital's latest thinking on developments in the global marketplace. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital.
Peter Schiff
Friday, October 18, 2002

Today's government announcement of the CPI should be given as much creditability as an Enron earnings report. That is why the CPI should be referred to as Pro-Forma CPI. The government manipulates the data to artificially minimize increases in consumer prices. That is because the government has a vested interest in maintaining the illusion that inflation is not a problem, just like Enorn had a vested interest in maintaining the illusion that it had earnings! The U.S. government is the world's largest borrower, with a 6 trillion dollar plus national debt, mostly financed with short term paper, a large percentage of which in the hands of foreign creditors. If our creditors were to get wise to the true inflation threat, they would demand that the United States government pay much higher rates of interest on its debt. This would cost the government hundreds of billions of dollars in additional annual interest payments, sending the annual budget deficit soaring, creating a self-perpetuating spiral of bigger deficits causing rising interest rates, causing bigger deficits, etc. Not to mention the negative effect sharply higher interest rates would have on the American economy so heavily dependant on spending from over-leveraged consumers deriving their incomes from over-leverage employers and collateralizing their borrowing with over-valued real estate! Also, by manipulating the CPI data the government is able to reduce its cola adjustments to social security recipients and other inflation indexed programs, while limited increases in inflation indexed income tax exemptions, not to mention the money the government saves on interest pays to holders of inflation protected treasury obligations (TIP's).

Inflation, properly defined, is an increase in the supply of money and credit. The Federal Reserve has recently pursued the most inflationary monetary policy in its 89 year history. Initially inflation resulted in the stock market bubble. However, as stock prices are not components of the CPI no one cared. Next, inflation made its way into rising real estate prices. Again, no one cares. More recently, inflation is causing commodity prices to rise. The CRB is up 22 percent this year, and is now within 1 percent of a 4 year high. That is the biggest annual increase in the CRB since 1982. Inevitability inflation will result in rising consumer prices, and will ultimately be reflected in significant increases in the CPI, despite the government's best efforts to manipulate the data.

One of the main reasons that the CPI has not been increasing at a more rapid rate (other than government manipulation) is the enormous merchandise trade deficit. Today's release of the August data show yet another all time record high trade deficit. As dollars flow out and foreign manufactured products flow in domestic consumer prices are held in check. But when the buddle in the dollar finally busts consumer prices will soar as wealthier foreigners out-bid poorer Americans for all sorts of merchandise and natural resources, sending the CPI through the roof.

In fact, it is the trade report, not pro-forma CPI, that is the one truly significant economic release of the day, for it shows just how unproductive, non-competitive and mal-invested the U.S. economy really is.